24 Terms You Need To Know
As a business, you know that receiving more money than you spend means that you have a successful business. On the other hand, you know that you must spend money to make money. How do you keep track of all your expenses and earning? The answer is accounting. Accounting can sound scary and confusing, but once you realize that is just a record of what you spend and what you receive it becomes a little bit simpler.
Accounting is important because it gives your business an idea of how much money it is making and how much it is using. It allows you to see where you can make improvements and keeps you responsible for the decisions you make. It is important for banks and for IRS tax purposes. You must be able to understand and discuss general accounting principles, even if you hire an accountant or use a computer program, because accounting and money are the language of business.
The most important part of accounting is understanding the vocabulary that comes along with it. Here a few key terms you should know to help you understand your accounting books.
- Accounts payable – money your company owes outside suppliers for goods or services you have purchased using credit instead of cash
- Accounts receivable – money owed to your company by customers who have paid using credit instead of cash
- Balance Sheet – a financial statement of your company at a point in time. Your assets go on one side and your liabilities and capital go on the other, and the two sides must equal, or balance.
- Cash – the spending potential of your company, could be in a checking account.
- Cash flow – a measure of the amount of cash that comes into your business and the amount of cash that goes out of your business, it can be different from the profit of your business. A cash flow statement determines your current amount of cash.
- Cost of Sales – the amount of money it takes to produce and sell your goods or products
- Credit – an accounting entry that represents an increase
- Current assets – Assets, like cash and inventory, which could be turned into cash within a year’s time
- Debit – an accounting entry that represents a decrease
- Depreciation – Using the amount that a large piece of equipment or building decreases in worth per year to account for its total cost over a length of time.
- Dividend – the portion of after tax profits paid out to the owners of the business § Double Entry – a system of accounting where for every transaction, two entries are made into the balance sheet, generally a credit and a debit
- Equity (Owner’s Equity) – the owner’s share of the business
- Fixed assets – Assets, like equipment and buildings, which cannot quickly be turned into cash
- Fixed Costs – costs that do not change with your volume of business, for example: rent, interest, and salaries
- General Ledger – a moment by moment account of all transactions by the business, today generally managed by a computer program
- Gross Margin – your income minus your cost of sales
- Income (Profit, Revenue) – the money you earn selling something, not always cash
- Income Statement – a financial statement for your company over a period of time, determines your net profit
- Interest – a charge paid regularly for the use of money lent until the debt is repaid
- Inventory – the supply or stock of goods or products which your company intends to sell
- Liabilities – amount of money owed by your company to others, includes accounts payable
- Net Profit – your gross margin minus your fixed costs. Another way to look at it is your total assets minus your total liabilities.
- Variable Costs – costs that change with your volume of sales, such as the amount of materials you need for your products.
Most people however, need to see examples to truly understand the ins and outs of accounting. There are many great resources out there to learn basic accounting. SmallbizU has an excellent, free online course. It takes roughly 30 minutes, but walks you through every step of the basics of accounting in a way that is easy to follow. It is in your best interest to go through this and to brush up on your accounting terminology and skills often.
You began your business to bring a product or service to your customers. You must generate income to be able to run your business and to take care of your own personal needs. The best way business thrive and help your invests last is to understand how you are spending your money and what your customers are buying. Good accounting is not only essential for tax purposes, but it provides you with a snapshot of your company so that you can study it and improve upon it.